Facebook IPO: Six key dates in its debacle

Morgan Stanley's New York headquarters are seen at the corner of 48th Street and Broadway in New York earlier this week. On May 9, after Facebook revealed a growing gap between user and revenue growth, Morgan Stanley and other analysts began to tell institutional clients that they were revising downward the company's revenue estimates.

Andrew Burton/Reuters/File

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A key disclosure – May 9, 2012

Midway through its five-day road tour by top executives to convince institutional investors to buy the stock, Facebook amended its prospectus to include this sentence: "Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results."

It was a vaguely worded but key revelation: If more Facebook users were using smartphones, which had fewer ads than the desktop versions of Facebook, then the company's future revenues were likely to grow more slowly than its growth in users. In the days following, analysts for Morgan Stanley and at least three other underwriters reduced their revenue forecasts for the company's second quarter and the full year, although few people knew about it at the time. The analysts began to tell institutional clients verbally of the downward revision. Because of Depression-era rules designed to keep smooth-talking Wall Street brokers from talking regular investors into buying stock, the analysts could not publish their revisions or warn retail investors, according to Arthur Levitt, former SEC chairman. By law, "they could not do what they should have done."

Facebook's amended filing didn't go unnoticed. The Associated Press reported it the same day, but it emphasized the positive: "The finding implies that Facebook has room to grow in the still-nascent mobile advertising space." Later news reports suggested that institutional investors had grown wary.

None of this seemed to bother Facebook. Six days later, on the same date that The Wall Street Journal reported that General Motors planned to stop advertising on Facebook because its ads were ineffective, the company increased the price range for its IPO to $34 to $38 per share. A day after that, citing extraordinary demand, it said it would sell an additional 84 million shares in its IPO, worth up to $3.2 billion.